A bright outlook for zinc?

The zinc market began 2021 on a good note after remaining subdued most of 2020 because of the COVID-19 pandemic. A rise in construction spending and a recovery in global economies helped the market rise gradually the first half of last year.

In the second half of 2021, however, consumption in the global zinc market improved exponentially because of increased demand from new industries, such as electric vehicle batteries and renewables, as well as from existing sectors, such as galvanizing, construction and automotive.

A bumpy second half

The quick recovery and pent-up demand from 2020 also brought along its own set of headwinds, which began in May 2021 and resulted in high costs for transportation, as well as material procurement and supply constraints. According to the Lisbon, Portugal-based International Lead and Zinc Study Group’s (ILZSG’s) midyear outlook, these factors were exacerbated by a potential deficit of 17,000 metric tons in the zinc market by the close of 2021.

By September of last year, these issues were affecting almost all commodity markets. Additionally, tightening supply of primary material saw zinc prices and premiums begin to rise. Demand remained robust during this period, causing additional upward pressure on zinc prices.

If production halts and reduced output in the auto sector affected demand in the first half of 2021, the second half was marked by an energy crisis in Europe and China that prompted many zinc smelters to reduce their production or suspend operations altogether.

Nyrstar, based in the Netherlands, reduced its production by half during this period, while Glencore’s 100,000-metric-ton-per-year zinc sulphide operations in Portovesme, Italy, shut down for maintenance through December due to high energy prices. In Ireland, Boliden’s Tara Mines, one of Europe’s largest zinc reserves, stopped production for a few days after water entered its ventilation shaft.

These factors further tightened the already limited supply of zinc. In September of last year, the global zinc deficit climbed by 30,000 metric tons to 44,000 metric tons within a month, according to ILZSG estimates.

In Asia, China’s property crisis that began in September 2021 also reduced demand from the country, which is one of the largest consumers of zinc, according to an analysis by Yash Sawant, a research associate at Mumbai, India-based Angel One Ltd. He adds that weaker demand prospects likely will remain and could be a considerable headwind for zinc.

Zinc is used for galvanizing, therefore a slower growth rate in China’s steel output because of the government’s rules limiting energy use also clouded the outlook for zinc throughout most of the third quarter of 2021, Sawant says.

Strong fundamentals

The fundamentals remain strong to support zinc market demand into this year. Michael Cuoco, head of metals and bulks fund sales at StoneX Group Inc., headquartered in New York City, reflected on this during a presentation at the International Zinc Association’s International Zinc Recycling Conference Nov. 2, 2021, in Charlotte, North Carolina. He said global demand for galvanized steel remains strong, growing by more than 12 percent annually, while growth in semis from brass mills is more than 7.5 percent per year. With China auctioning off its old inventory, demand in this region is likely to remain healthy amid auto production backlogs and additional spending announcements made by the Chinese government.

Reduced zinc mining in China as well as supply and logistics constraints in South America likely will tighten supply further. Cuoco noted that some estimated China would require roughly 1 million metric tons per year of zinc to fill the gap left by these supply constraints.

The latest ILZSG forecast projects that refined zinc demand will increase by 6.2 percent to 14.09 million metric tons by the end of 2021 and will ramp up further by 2.3 percent to 14.41 million metric tons this year. Despite a slowdown in activity in October 2021, the Chinese galvanizing industry picked up pace again in November of last year, with the ILZSG forecasting an increase of 2.1 percent in Chinese zinc consumption in 2021 before it slips to 1.5 percent in 2022.

Refined zinc production also was pegged to rise, with ILZSG projecting a 2.5 percent increase to 14.13 million metric tons in 2021 owing to 3.2 percent growth in output in China and increased production in Italy, Japan, Peru, India and the United States. A 20,000-metric-ton expansion of Canadian Electrolytic Zinc Ltd.’s Salaberry-de-Valleyfield smelter in Quebec in the first quarter of this year also is expected to lift world refined zinc production by 2.3 percent to 14.45 million metric tons.

Pricing pressures

The tightness in supply through the second half of 2021 boosted London Metal Exchange (LME) Zinc cash prices, which hit a record of $3,814 per metric ton Oct. 18, 2021. Since then, prices have remained high, with LME Zinc cash remaining firmly within the $3,000 per metric ton range in November 2021.

According to an outlook by Fitch, prices over the next two years could rise in response to the ongoing shortage in refined zinc, which is likely to last until 2023. In the short term, Fitch has revised its LME Zinc spot projections upward by $100 per metric ton to $2,900 per metric ton. Prices are expected to remain stable at these levels through 2022 before softening to $2,500 per metric ton in 2023 and to $2,200 by 2025.

Long-term trends for zinc are unchanged at $2,100 per metric ton, though the metal’s price trends for the period between 2022 and 2025 were lifted by $100 to $500 per metric ton.

The higher LME Zinc prices were reflected in the growth in special high grade (SHG) zinc premiums. The climb began in September 2021 when the SHG zinc premium climbed from an average of between 7.5 and 8.5 cents per pound to more than 10 cents per pound. As the energy crisis in Europe deepened, the premium for SHG zinc increased. By November, Davis Index reported that U.S. SHG zinc premiums averaged between 12 to 15 cents per pound due to supply issues and high freight costs.

SHG zinc premiums are expected to remain within this range at least in the U.S. through January of this year, though many suppliers say they believe they likely will climb higher in Europe if smelters continue to reduce their output.

Higher premiums have resulted in growing premiums for zinc alloy grades, with Zamak No. 3 and Zamak No. 7 premiums rising to average between 22 to 26 cents per pound above the LME Zinc cash price through most of the last quarter of 2021. Zinc scrap prices also have risen in tandem over the past six months, with new zinc diecast prices averaging between 94 cents and $1 per pound, with the higher range most evident in October 2021 when LME Zinc cash prices hit a record high. The Davis Index for new zinc diecast corrected down in November to average roughly 94 cents per pound delivered to a U.S. consumer.

Looking at 2022

Demand for zinc is here to stay, but the question remains whether supply will keep up. The ILZSG expects a slight surplus of 44,000 metric tons in 2022. Cuoco says much will depend on factors such as zinc concentrate production. The timing of the restart of European smelters as well as ongoing freight issues could shape the surplus-deficit balances for zinc over the next six months.

Radhika Ojha is editor, Americas, at Davis Index and can be reached at radhika.ojha@davisindex.com.